“Maximum chaos” — that’s how the latest proposed Congressional tax fixes are being described among estate planners and attorneys. We already knew the end of the year might bring big changes as Congress scurries to reinstate the estate tax, which expired on December 31, 2009, and is slated to come back on January 1, 2011, at ridiculous rates. But now Congress might (the operative word is “might”) pass legislation that turns what most observers thought was the safest course in this sea of treachery into the worst of choices.

The problem is Congress’ inaction. The estate tax, as we said, expired on December 31 last year as part of the Bush-era tax revisions. It was scheduled to reappear in 2011, but at levels not seen since the 1990s when Bill Clinton was president. When the estate tax expired, the maximum exemption was $3.5 million and the maximum rate was 45% on estates above that. As now proposed, the maximum exemption would be $1 million with a 55% tax rate for estates above that amount. In his proposal announced December 6, President Obama proposed a $5 million exemption and a 45% tax rate. This caused a sigh of relief among estate planners who feared nothing would be done, or, worse, the Obama Administration would cave in to the liberals who want to tax the wealthy, and keep the exemption at $1 million.

However, Obama’s proposal is just that, a proposal. Other proposals are circulating, among them one by Sen. Max Baucus (D-Mont.) that would be retroactive to December 2, the date of its introduction. The sinister thing, from a gift tax view, is that his bill sets a top gift tax rate of 45% and reinstates the generation-skipping tax (GST). The reason this is so problematic for planners is that, though the gift tax was still in effect in 2010, the maximum rate was 35% and there was no GST. Many planners had taken the position that, due to the uncertainty in the estate tax rules, it was better to wait to make gifts in 2010 until the landscape became clearer, probably near year end. If the estate tax was reinstated at unfavorable rates (such as a lower exemption or higher tax rate), it might make sense to make a gift in 2010 and pay the 35% tax instead of waiting and incurring a higher rate as part of a reinstated estate tax. On the other hand, if new legislation was favorable to the estate tax (such as upping the exemption so that an estate wasn’t subject to the estate tax at all), then no gift would be made and no tax incurred.

If the Baucus provision of a December 2 effective date somehow passes Congress, the window for making gifts will have already closed. Then, depending on what Congress does with the estate tax, some people might be left wishing they had made a gift before Thanksgiving.

It’s important to note that the Baucus bill did not pass. But now that Obama has come out with a proposal to keep the Bush tax cuts, the focus of debate will likely shift from estate and gift taxes, which impact few, to income tax cuts, which impact everyone. Estate planners are afraid that the December 2 effective date will fall through the cracks of debate over a tax bill in general, and be kept as an unintended consequence of any new legislation.

Steve Chambers has been an attorney in Salt Lake City, Utah, since 1976. He is currently with the firm of Nielsen & Senior where he practices in the areas of estate planning, elder law, estate and gift tax and personal financial planning. In addition to being a lawyer, he holds an MBA from the University of Utah. Read more from Steve Chambers at his blog.